How Union Bank is Rethinking Affordable Housing in California

HOUSING DILEMMA: Financing affordable rental developments is "profitable" and "low risk," but the state's elimination of a key funding element has created a "huge challenge," says Annette Billingsley, executive v.p. of community development finance at Union Bank in San Francisco.

There are no vacancies at the Birch Hills Apartment Homes, and it isn't hard to see why. Just 10 miles from Disneyland, in Brea, Calif., the recently built, family-oriented property offers a swimming pool, computer lab and plenty of recreational space.

Rents are comparatively affordable by design, ranging from $500 a month for a one-bedroom apartment to $1,050 a month for three bedrooms. Many of the development's low-income residents work at nearby retail stores and otherwise would have a tough time paying rents in the area, which typically are more than double the rates here.

The Spanish-style apartments are in such demand that there's a waiting list of more than 1,000 hopeful renters trying to get in.

"It's essentially recession-proof," says Annette Billingsley, executive vice president of community development finance at San Francisco-based Union Bank, which helped fund the complex. "It's a profitable business, and the reason it's profitable is because it's low risk."

But in California, affordable housing projects like this one are now in jeopardy.

Billingsley and other community development bankers in the state were thrown a curveball two years ago when California dismantled its redevelopment agencies, cutting off $1 billion in funding for affordable housing. As a result of the policy changes, developers are scrambling to finance nonprofit projects with lighter government subsidies or are rehabilitating older apartments, rather than building new ones.

When Birch Hills went up in 2012, Union Bank provided $18 million in construction financing and $11 million in low-income tax credit equity, as well as another $8 million in permanent financing. The city of Brea donated the land and provided $4.75 million in redevelopment funds. It is unclear whether the complex could get built today, without the financing from the redevelopment agencies. With this funding source gone, projects like the one in Brea are expected to become much rarer.

Ronne Thielen, a longtime affordable housing advocate and an executive vice president at R4 Capital, an affordable housing tax-credit investment management firm, says that until the recent changes, redevelopment agencies had provided as much as 30% of the financing for affordable housing projects in California.

"It's been a deal killer," she says of the agencies' dismantling.

For Billingsley's group, which made loans to or invested in tax credits in 24 affordable housing projects last year, markets outside California may help pick up at least some of the slack. The group closed on an equity investment in New York in the fourth quarter, and it is expanding into Oregon, Texas and Washington.

But the majority of its projects are in California, where the bank, a subsidiary of Japan's Mitsubishi UFJ Financial, has 447 branches.

Billingsley is hopeful that California's state legislature will pass a bill that would restore about half of the funding for affordable housing that was cut off when the redevelopment agencies were dismantled. The proposal seeks to raise money by charging a $75 recording fee for real estate documents such as deeds, declarations of homestead and notices of default.

In the meantime, Billingsley is searching for more permanent financing at the state and local level to replace the community redevelopment funds that have been lost.

Some cities, including San Francisco and Seattle, have created their own housing funds that potentially could be tapped. But in the end Union may be forced to scale back on some deals, focusing on rehabilitating older buildings rather than financing new ones or paying more for low-income housing tax credits, a class of instruments designed to incentivize private investment in affordable housing.

"The pipeline going forward is tougher and tougher," Billingsley admits. "Our clients are all looking for more funding sources."

The loss of California's redevelopment agencies comes at the same time as larger demographic and economic shifts that are swelling the ranks of low-income Americans—and the demand for affordable apartments.

The number of renters with very low incomes—less than 30% of the local median, or about $19,000 a year—jumped by 3 million to roughly 12 million between 2001 and 2011, according to a report released this month by the Joint Center for Housing Studies at Harvard.

But the number of affordable rentals has remained unchanged at about 7 million units. The gap between the supply of affordable rental housing and demand is probably even wider than the statistics indicate, because about 2.6 million of affordable rentals are occupied by higher-earning households that are essentially "crowding out" those with the lowest incomes, the Harvard study found.

Fred Copeman, a principal at the accounting firm CohnReznick, called the shortage of affordable rental housing "critical and severe," and estimates the United States needs to build another 6 million to 7 million units to keep pace with demand. But the primary source of federal funding for affordable housing, the Low Income Housing Tax Credit Program, has not adequately addressed the gap.

Expect banks to pull back on energy lending in the near term, as regulators step up their scrutiny of oil loans and bankers approach the business with a "different attitude," says Mariner Kemper, chairman and chief executive at UMB Financial in Kansas City, Mo.

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